Summary
Since 1 January 2025, intentionally underpaying an employee has been a criminal offence under the Fair Work Act 2009. Individuals face up to 10 years' imprisonment, fines, or both; companies face fines running into millions. The offence was inserted by the Fair Work Legislation Amendment (Closing Loopholes) Act 2023.
The word that decides whether any of that touches you is intentionally. An honest miscalculation is not a crime and never has been. But the line between "mistake" and "intention" is not where most employers assume it is, and the civil penalties — which apply whether or not anyone intended anything — went up at the same time and are the far more likely exposure.
This guide covers what the offence actually requires, the safe harbour for small business, the five ordinary payroll habits that turn into underpayment claims, and what to do about them.
What the offence actually says
Three things have to be true before conduct is criminal:
- The employer is required to pay an amount to an employee under the Fair Work Act or a fair work instrument — an award, an enterprise agreement, or an order.
- The employer intentionally engages in conduct.
- That conduct results in a failure to pay the amount on or before the day it is due.
The amounts covered are broad: wages, and also entitlements such as superannuation contributions and paid leave. A short list is carved out — including long service leave under state and territory law, and payments for jury service — but assume most of what appears on a payslip is in scope.
What the offence is not is an underpayment that happens because someone read the wrong classification level, or because a spreadsheet dragged a formula one row too far. Those remain civil contraventions. The prosecution has to prove intention as to the conduct that produced the failure.
How an honest mistake becomes an intentional one
Here is the part employers underrate. Intention is not proved by a confession; it is inferred from conduct. And the most common route from "we got it wrong" to "we meant it" is simply time after being told.
An employer who discovers a shortfall, works out what is owed and back-pays it has made a mistake. An employer who receives a written complaint from a staff member, or an underpayment finding from an accountant, and then keeps running the next twelve pay cycles the same way, is doing something a court can characterise very differently. The first pay run after you knew is the one that matters.
The practical consequence: the date you found out is now a compliance event. Record it, record what you did about it, and do something in the next pay cycle rather than the next quarter.
The small business safe harbour
There is a genuine protection here, and it is underused. The Voluntary Small Business Wage Compliance Code is a declared instrument for employers with fewer than 15 employees. A small business employer who has complied with the Code cannot be referred for criminal prosecution in relation to that underpayment.
The Code does not require you to have been right. It asks whether you intended to underpay, and it lists the evidence that shows you did not. In substance:
- You made a reasonable effort to work out the correct award and classification for each person.
- You kept the records the Fair Work Regulations require, and used them.
- You sought and acted on information from a reliable source — the Fair Work Ombudsman, an accountant, an employer association.
- When an error surfaced, you corrected it and told the affected employee.
- You cooperated with any inquiry.
Read it as a checklist rather than a defence, because that is how it works in practice: every item is something you either did before the error or you did not, and none of it can be assembled afterwards. Our overview of Fair Work compliance for Australian employers covers the classification step in more detail.
If you are over 15 employees, the equivalent lever is a cooperation agreement: self-report to the Fair Work Ombudsman before an investigation begins, and while an agreement is in force the FWO will not refer the conduct for criminal prosecution. Civil action remains possible. Self-reporting is not free, but it is markedly cheaper than being found.
The civil penalties are the realistic risk
Almost no ordinary employer will face the criminal offence. Nearly every one is exposed to the civil regime, which was strengthened in the same package:
- Maximum penalties for underpayment contraventions increased substantially, and for larger employers a penalty can be calculated by reference to the underpayment itself rather than a fixed cap — so the size of the shortfall drives the size of the penalty.
- "Serious contravention" now includes reckless conduct, not only knowing conduct. Recklessness means being aware of a substantial risk and proceeding anyway — which is a much easier thing for a regulator to establish than knowledge, and a much easier thing for a busy employer to stumble into.
Add to that back-pay, interest, and the cost of reconstructing several years of records, and the civil exposure from a single systematic error usually dwarfs anything else on the list.
The five habits that produce underpayment claims
In practice, claims rarely come from an employer deciding not to pay. They come from these:
1. The wrong award, or the right award and the wrong level
Classification is the single most common root cause, and it drifts: someone hired as a level 2 picks up supervision, keyholding or training duties and stays on level 2 for three years. Re-check classifications whenever duties change, not only when someone is hired.
2. An annualised salary that stopped covering the hours
Paying above the award does not discharge the obligation by itself. Awards containing annualised wage arrangements generally require the employer to record start, finish and unpaid break times, have them signed off each pay period, and reconcile the salary against what the award would have paid at least annually — with any shortfall paid. A salaried manager who quietly moved from 40 hours to 55 is the textbook case, and the salary that was generous in year one is a shortfall by year three.
3. Time worked that nobody recorded
Setup before opening. Cash-up and cleaning after close. The ten minutes of handover. A compulsory pre-shift meeting. Responding to messages from home. Each is small; multiplied by a team and a year it is not. If attendance is captured by a roster rather than by what actually happened, this gap is invisible by construction — which is the argument for capturing real clock-in and clock-out times rather than assuming the roster was worked.
4. Rounding that only ever rounds one way
Rounding time to the nearest quarter hour is not automatically unlawful, but rounding that is systematically down — clock-in rounded forward, clock-out rounded back — produces a consistent shortfall and is indefensible once someone graphs it. If you round, round symmetrically, and be able to show that it nets out.
5. Penalty rates and loadings applied to the roster instead of the record
Overtime, weekend and public holiday rates attach to hours actually worked. A shift that was rostered 9-5 and worked 9-6.30 attracts overtime on the extra 90 minutes whether or not anyone updated the roster. Our guide to penalty rates works through how the loadings stack.
The record-keeping multiplier
This is the part that converts a small dispute into a large one. Under the Fair Work Act, where an employer has failed to keep or produce required employment records and cannot show a reasonable excuse, the employer bears the burden of disproving the allegation about what was worked or paid.
Ordinarily an employee must prove they were underpaid. Without records, you must prove they were not. An ex-employee's recollection of their hours, unrebutted, can become the accepted figure — and it will not be a conservative estimate. We covered what must be kept, and for how long, in employee record-keeping in Australia.
What to do in the next month
- Confirm the award and classification for every employee, and write down the reasoning. Two lines per person is enough; the point is that a reason exists.
- Reconcile every annualised salary against the hours actually worked for the last twelve months. If you cannot, that is itself the finding.
- Compare rostered hours to recorded hours for one ordinary week. A consistent gap in either direction is your answer.
- Check your rounding is symmetrical, or turn it off.
- Verify records go back seven years and are legible, in English, and available.
- Write down your escalation step: who is told when a shortfall is found, and by when it is fixed. This is the single item that separates a mistake from an intention.
- If you find something, fix it and tell the employee. Voluntary correction is looked on very differently from discovery.
Where a time and attendance system helps
Most of the above is a records problem before it is a payroll problem. The obligation is to know what was actually worked, keep it for seven years, and be able to produce it.
NestedClock records actual clock-in, clock-out and break times per person per location, keeps the history rather than overwriting it, and logs every admin adjustment with who made it and why — so a corrected timesheet shows as a correction rather than as a record that always said that. Rostered hours and worked hours sit side by side, which is what makes habit three visible instead of invisible. None of that decides your award interpretation, but it does mean the reverse onus above is not the position you argue from.
Where to check the detail
The offence sits in the Fair Work Act 2009 as amended by the Fair Work Legislation Amendment (Closing Loopholes) Act 2023. The Voluntary Small Business Wage Compliance Code and the cooperation agreement process are both published by the Fair Work Ombudsman, and the Code is worth reading in full — it is short.
This article is general information, not legal advice. Award coverage, classifications and enterprise agreements are specific to your business, and the penalty figures above are maximums set by legislation that changes.